Tech Bubbles, Inflation and Rapidly Rising Geopolitical Tensions

Tech Stocks

January witnessed a material market sell-off focused on tech stocks as most investors are by now already aware. Whereas some have expressed alarm and concern regarding this tech stock led sell-off, we believe that this is in fact very healthy for two reasons. Not only has tech been the most thinly stretched and most overvalued segment of especially the US market now for some time, but this is actually also a part of the current style rotation which we have clearly started to see come through in greater earnest over the last few months. As such we view this as a very healthy twist.

Inflation

The arguably more unsettling risk factor which has emerged more recently is the seemingly rampant US inflation and jobs data, which although both explicable has given rise to market concerns that the Fed might intervene substantially more aggressively with larger and quicker interest rate hikes. This poses particular risk to the bond and credit markets and we have positioned prudently in accordance with expectations for rising rates for some time already, albeit that short-term market turbulence may again add further to increased market volatility.

Russia – Ukraine Debacle

The third and most recent risk factor has been the rise in geopolitical risk coming into 2022 which we have also highlighted previously as a distinct possibility. Whereas up until as recently as last week most political commentators and military analysts were in agreement that Putin would not likely press his hand in the Ukraine. The most recent pronouncements by the US however seem to indicate that if an invasion were to occur that it is likely to commence as early as the coming week. US officials have ordered all embassy and US personnel to evacuate which has further added alarm to markets already feeling as if they are in need of Prozac given the elevated stress levels this year so far following the comparative calm on all three the above fronts over the last 18 months.

Of the above three risk factors, we are comfortable that the former two have not only been sufficiently telegraphed but may even present distinct opportunities for many of the fund managers that we are invested in. It is therefore only the rising geopolitical risk in Ukraine which we think might warrant further discussion.

If most commentators to date have been correct and this entire exercise is merely Putin trying to strengthen his hand in global negotiations, then the most recent “all-in” move should represent the pinnacle of tension which would subsequently subside. Far from being an exercise in futility, we believe that the chief aim throughout has been the fracturing of NATO, with Germany (and German reliance on Russian gas) is at the epicentre of this divide.

It is however worthwhile discussing the likely scenarios and outcomes should Russia indeed invade Ukraine in the coming two weeks. Firstly, it is important to note the timeline specified – if this is likely to occur then it will almost certainly happen within the coming two weeks, as this coincides with the timetable for mass troop and naval buildups as part of “planned exercises” on Russia’s part. Secondly, if an invasion of Ukraine were to occur then most commentators still seem to believe that Russia would only invade the eastern part of Ukraine and stop short of a full-scaled annexation of the capital, Kiev. Putin does not want to own Ukraine, merely break its spirit, soften its borders and hold an economic gun to its head to force equivalent surrender. Even if the latter occurred without any bloodshed, this would likely serve to solidify NATO in its opposition, with at very least incredibly harsh and devastating economic sanctions likely to take a very strong toll on Russia and with Putin risking his political career in the process.

It is this latter scenario which potentially presents the most distinct opportunity for underlying managers to reduce risk for a very small yet finite amount of time, namely around two weeks as previously mentioned, and we believe that this is what most managers will likely also do to whatever extent is feasible and within mandate.

Whereas some investment platforms allow for quick actioning of trades, those that do not will likely squander this opportunity for investors to reduce risk in the very short term. Investors and model portfolio managers alike should however be clear on their intent and timelines. Not only do we expect many underlying managers to already be more defensively positioned than the market norm, but funds may also be mimicking the above logic and increase cash merely over the short term. Investors who decide to act on their own accord, in addition, should be clear at the outset on their timeline as well as acting strictly accordingly, as the temptation is always to give in to further hesitation and remain out of the market for reasons which may seem very logical after this time period has expired.

Conclusion

Reacting is emotional whereas responding is emotional intelligence. A reaction is a reverse movement or tendency. Reactions are done on impulse, without putting much thought into it or considering what the end result may be. A response can be defined as saying something in reply. A response is more thoughtful and done with reasoning. People who respond put their thoughts ahead of their actions.

Stone Wealth Management’s most important value is to help clients to respond to their changing environment and not react. This requires them to be mindful in making informed decisions understanding the full consequences.

In the short term, reacting to news flow and noise has proven to be costly. In the long run, sticking to a disciplined plan and investment strategy has increased your probability of meeting clients’ objectives. Better outcomes are the result of better decisions.

With thanks to Francois Cilliers.

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